Estate Planning tool for Legacy Planning and Philanthropic Interest

Estate Planning tool for Legacy Planning and Philanthropic Interest

August 20, 2020

Here is an interesting financial planning tool for legacy planning and philanthropic interest. Its called a Charitable Lead Annuity Trust (CLAT) which is a type of trust that helps in legacy planning for both philanthropic interests as well as family, passing assets to the next generation gift and estate tax free without using your lifetime exclusions.

This financial planning vehicle is particularly helpful to wealthy individuals who have a charitable interest but are subject to gift or estate taxes, and it also works especially well in a low interest rate environment.

The objective of the CLAT is to make an ongoing annual payment to charity, and at the end of the life of the trust, after the charity receives their final payment, any principal remaining in the trust is passed to the heir’s estate tax free. 

Since the lower the interest rate the higher the proportion that is passed to the grantor’s heirs, today’s low interest rates are helpful in passing assets to the next generation.

One very useful strategy is to create a lifetime CLAT funded primarily with insurance policies which pre-determines the payments to both charity and his heirs, and to name a Donor Advised Fund (DAF) as the charitable beneficiary to provide maximum flexibility with charitable giving.

As an alternative, one could just purchase an annuity going to the charity with a fixed annual payment (and use the balance to purchase a smaller insurance policy for the family). In this manner, the added risk of the final large payment being is not there, but the arbitrage is not as strong.

CLATs have been used for decades and may be funded with all types of assets, bonds, equities, etc.  After the trust commitment to charity is fulfilled the balance of the assets flow to the heirs. When funded, for example, with equities, the value of the CLAT is dependent on financial market performance, and the final payments to heirs can vary significantly. 

The DAF is like a bank account for charitable giving and it cuts down on the administrative work. The allocation between the two is a function of the grantor’s age and interest rates, and a big advantage of this method is that you know exactly what the annual and future payments will be. Since this is a lifetime trust what you do not know is when they will occur since the final payment is made upon the trust maturity, the grantor’s passing.

Nicholas Guerrra, an estate planning attorney at Cole Schotz P.C. in Boca Raton, FL, says "Utilizing a properly designed charitable lead annuity trust [CLAT] can be an efficient tool for a taxpayer who is charitably inclined to both (i) benefit the charity of his or her choice and (ii) obtain a significant income tax deduction to effectively minimize his or her income taxes. This immediate income tax deduction can be helpful to offset the income taxes resulting from a Roth IRA conversion. Additionally, it is possible for taxpayers to increase their available cash flow by financing the assets used to fund the trust due to the tax savings derived through the immediate income tax deduction."